Public tech companies outperform venture capital

12/01/2017By Sammy Abdullah, CFA

It feels like every asset class is white hot right now with the DOW, S&P, real estate, and Bitcoin setting new records consistently. We decided to look at the performance of tech companies since their IPOs to see how a true diversified buy and hold strategy in tech has performed. The table below shows very compelling returns, with a median annual compound return of 17% (Note The median IPO date of the 123 company data set is October 2013 and notably, 90 of the 123 companies are up since their IPO while 33 are down. The data shows the return through November 29, 2017).

It's almost too compelling, beating most venture capital funds. It brings up a legitimate question: why invest in private, risky venture capital when better returns can be had in a less risky, diversified portfolio of liquid publicly traded tech companies?

A recent article from the Wall Street Journal shows that indeed a 17% IRR would easily beat most venture capital portfolios and likely be in the top quartile (line graph to the right; sorry for the crude cut out).

If a diversified portfolio of public tech companies continues to outperform or even match the performance of venture capital funds, it could result in a decline in venture capital funds raised as investors opt to invest in less risky, liquid, publicly traded tech companies versus small, risky, privately held venture portfolios. Venture capital is going to have to see improvement or else the industry will shrink.